Capital outflows pick up during 2H 2010

Russia’s Central Bank has doubled its capital outflow forecast for 2010, now expecting more than $22 billion to flow from Russia, with the situation worsening during the second half.

­After seeing capital outflows of $130 billion in 2008, and with a further $56.9 billion in 2009, it had been hoped that 2010 would see the capital outflow staunched.

The first 8 months of the year saw a net capital outflow of $12 billion. But Anton Stroutchenevsky, senior economist at Troika Dialog, says that the situation is worsening and the likely full year outflow is likely to be even worse than the Central bank is forecasting.

“Full Year, we see net capital outflow will be close $30 billion. Actually the situation deteriorated significantly in the second half of this year. Russia’s economic growth is decelerating, budgetary policy is becoming too generous, I would say. And for the next forthcoming 3 years we will have a significant, for Russia, budget deficits. So people they are looking for more interesting places in the world, and they exist.”

Although the capital outflow is well down from last year over the first three quarters, Vladmir Osakovsky, Chief economist at Unicredit securities says the numbers are misleading.

“Unfortunately, this improvement in the general balance of capital inflows does net necessary imply that people started to invest more into Russia, but that they’re willing to lend to much more Russia”

Analysts say the outflows are masked by the major corporate and sovereign bond offerings emanating from Russia this year. Vladmir Osakovsky, Chief economist at Unicredit securities says they are drawing inflows.

“Next year the Russian government is planning on borrowing $50 billion in rouble equivalent, on domestic and external markets. We think that such a big borrowing program is likely to draw large scale capital inflows into Russia.”

The borrowings will offset capital outflows but they aren’t the long term investment the Russian government is seeking. A large part of the reticence of global investors to invest in Russia reflects its risk profile. Russia is about to enter a major election cycle starting with parliamentary elections next year and concluding with Presidential elections in 2012, meaning risk is likely to continue to pervade investor sentiment with the long term issue of capital outflows likely to remain.